Thursday, January 08, 2009

Deflation can be a good thing

Some economists worry that deflation will cause people to stop shopping. They say, "why would people buy now when the price will be lower if they wait?"

We've already had deflation for many years and it didn't stop shopping. In the computer and electronics industry, prices keep falling. Next year's digital cameras are cheaper and they keep adding more features.

People keep buying them anyway.

Then, when the newer, cheaper versions come out next year, they buy again, sometimes tossing the old camera into a landfill.

Deflation doesn't necessarily stop people from shopping. Folks will figure, "if they wait till the price hits bottom, their lives will pass them by before getting a computer or camera." Their lives will pass them by before they get on Facebook, network with friends or send digital pictures to loved ones.

Of course doing these things aren't necessarily the "holy grail" of living, but those who buy electronic products haven't let deflation stop them from going ahead and making their purchases. Maybe it slows them a bit, but it doesn't stop them.

In house values, deflation could be a good thing also. Good for lower income people who may wish to enter the realm of home ownership.

Entry level prices for homes are way above the level that many working people in quite a few of our metropolitan areas can afford.

If house values come down, that's a good thing for aspiring first time home buyers.

Think "affordable housing."

Maybe this can help bring rents down also.

Of course deflation is hard on those who have already purchased and are watching their home values drop below what they still owe on the mortgage. Also hard for governments who rely on tax revenue from inflated property values.

Economics is never perfect.

For many years, we've had both inflation and deflation at the same time.

In 2005, I read that house values in Bellingham went up 23 percent in one year. That was the worse year for house value inflation locally that I'm aware of. Other years, though, it was around 10% while average wages didn't go up that fast.

Often wages are more influenced by the price of things like digital cameras. A realm where deflation resides.

Now it's "post 2008 bust" and the train wreck has arrived. Inflation and deflation have collided. People can't afford their mortgages from working in an economy of selling cheap items.

Deflation isn't bad. It's just that a lot of people have too much overhead.

High mortgage payments for inflated property, high medical care costs.

The problem isn't new, it's just that more people are noticing this now. The train wreck has arrived.

We've had a two tier economy for years. Really, it's a "multi-tiered" economy.

One of the problems with economists and all this talk about inflation or deflation is the fact that our economy doesn't inflate or deflate all together in one solid block.

Some things go way up in price and other things go down. Some things stay the same. That's normal life.

As these discrepancies become extreme and the economy starts pulling apart, it spells trouble.

Big gaps and chasms have been growing in our economy for years.

Discrepancy of incomes. Questions about affordability of housing and health care.

Worlds and realities splitting apart.

It's time to try and find ways to knit things back together.

Deflation can be one of the good things, if it means housing becomes affordable to more people. It isn't always easy however.

Maybe if people didn't have so much overhead, there wouldn't have to be such a frenzy to sell and buy products to pay the bills.

It's nice to buy new computers and digital cameras every once in a while, but I find that one needs to take a vacation from work, just to have the time for figuring out how to use these items.

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